Business Studies 2012 Page 1
Investment
Mar 15, 2016
Year 10 Investment
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Business Studies 2012
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Business Studies 2012
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Investment article from the paper:
Scott pappe – barefoot investor your
tube?
Questions:
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Holiday Homework:
Planning your ideal holiday
This assignment requires students to research and plan an ideal holiday and create a budget for it. Students are also required to present their proposed holiday to the class in the form of an oral report supported by the use of power point.
‘The world is a book and those who do not travel read only one page.’—St Augustine
Hooray, hooray, it’s time for a holiday! One of life’s pleasures is going on a holiday. For many, it is probably
the only time during the year that family or friends can spend quality time together, share exciting
experiences, and create new memories that will last a lifetime.
Travelling is about discovery—discovering and finding out about yourself, discovering new people of diverse
and interesting cultures, and discovering new ways of doing and seeing things. Travelling can be an
adventure, and all that you hear, see and do on your travels is likely to have a profound impact on the rest of
your life. People have different reasons for travelling: some people travel for the experience, some travel to
learn a new language, some travel to meet new people or to learn about other cultures, and some travel for
fun and relaxation. Whatever the reason, travel is a broadening experience and can provide a foundation for
becoming a global citizen.
People have different reasons for travelling: for the experience, for adventure, to meet new people or learn about other cultures, or for fun and relaxation.
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Travelling is not only for wealthy people; you can travel anywhere as long as it fits within your budget.
Travelling isn’t just about money either. It involves a lot of planning and organisation.
The Internet has changed the way we plan and organise our holidays. It is now possible to arrange a holiday
from the comfort of your home. Using the Internet, you can compare transport and accommodation options
and book flights, bus and train journeys, cruises, and accommodation directly. If you put in the work, you can
organise holidays that cost less than those available through a travel agent. You can also use a computer to
prepare your itinerary.
Australians enjoy holidaying and even in the current economic climate, many are taking advantage of a
strong Australian dollar combined with cheap flights and accommodation at reduced prices offered by major
airlines and hotel groups around the world.
Overseas arrival and departure figures from the Australian Bureau of Statistics show that more than 6 million
Australians travelled overseas in 2009, compared to 5.5 million people who came from overseas to Australia
in the same year. New Zealand is the most visited destination by Australians, followed by the United States,
Indonesia, Britain and Thailand.
Travel and Leisure magazine invited Australians to vote on their top dream destinations around the world.
The 2009 results are listed in the following table.
AUSTRALIANS’ TOP DREAM DESTINATIONS
Top 10 countries Top 10 cities Top 10 journeys
1 Australia 1 Paris 1 An African safari
2 Italy 2 New York 2 The Amalfi Coast from Positano to Ravello, Italy
3 France 3 Florence 3 The Inca Trail to Machu Picchu
4 New Zealand 4 London 4 Sailing the Mediterranean
5 United States 5 Sydney 5 Driving the Great Ocean Road, Victoria
6 Thailand 6 Prague 6 The Trans-Siberian Railway
7 Turkey 7 Barcelona 7 Sailing Antarctica
8 India 8 Bangkok 8 Highway 1 from San Francisco to Los Angeles, United States
9 Greece 9 Tokyo 9 The trek to Everest Base Camp
10 Japan 10 Dublin 10 Driving Route 66, United States
Source: ‘Aussies name top 50 favourite destinations’, The Sydney Morning Herald, 1 April 2009,
http://www.smh.com.au/travel/aussies-name-top-50-favourite-destinations-20090401-9jab.html
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Santorina, a volcanic island in the southern Aegean Sea, is one of the most popular holiday destinations in Greece.
Assignment Congratulations, you have successfully managed to save $5000 over the past few years! To get away from
the stress of school, you have decided to schedule an overseas holiday with a friend for 10 to 14 days to an
Asia-Pacific country. Here’s your chance to relax, unwind, take in the culture, the sights and the food of an
exotic location. However, planning your ideal holiday can be pretty stressful, but doing some effective
research can take it out of the too-hard basket. Organising the perfect holiday can be almost as much fun as
actually going on one.
Before you begin:
choose your destination
decide on your travel dates
choose the most suitable holiday for you (e.g. relaxing, adventurous, sightseeing, cultural experience)
plan your holiday based on a $5000 per-person budget
research your destination
decide on how you will make bookings (e.g. online, using a travel agent, direct contact).
The Asia-Pacific region includes countries (and destinations) such as:
Indonesia (e.g. Bali, Sumatra, Sulawesi, Flores, Lombok, Gilli Islands)
Thailand (e.g. Bangkok, Koh Chang, Koh Samui, Koh Phi Phi, Chang-Mai, Phuket)
The Philippines (e.g. Manila, Borecay, Batanes Islands, Palawan)
China (e.g. Hong Kong, Beijing, Shanghai, Xian, Suzhou)
Malaysia (e.g. Kuala Lumpur, Penang, Langkawi, Borneo, Sabah)
Vietnam (e.g. Hanoi, Ho Chi Minh City, Hoi An, Hue, Nha Trang, Halong Bay)
Cambodia (e.g. Angkor Wat, Phnom Penh, Siem Reap)
Fiji
Samoa
Cook Islands.
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The Cook Islands, a group of 18 islands in the South Pacific situated north-east of New Zealand, is a popular tourist destination.
Tasks
Working with your holiday companion, prepare a written report and a PowerPoint presentation to be
presented to your class about your ideal holiday to an Asia-Pacific country, based on a $5000 per-person
budget. Include three or four destinations within the chosen country that involve at least one internal flight
and one bus trip (if appropriate) to transport you between these destinations. Your report must also include
the following information.
1 Locate a map of the Asia-Pacific region. Make a list of five countries that you and your friend would consider for a holiday in this region. Decide on one country you would like to visit. You might like to collect brochures from travel agents or investigate possible destinations online to help you make this decision. (You might prefer to visit two countries rather than one).
2 Print a map of your chosen country. On the map, plot the three or four destinations you would like to visit.
3 Plot the route you will take on the map to complete your trip.
4 Decide on how many days you would like to spend at each destination. Note these details on your map.
5 Decide on the dates you would like to travel (you may have a preference for a particular season). Include graphs of average monthly temperatures for your destination.
Useful website: http://www.tripadvisor.com > Trip Ideas
6 Research the best-value airline for your selected departure and return dates. Remember, the cheapest price may not be the best option. Take into consideration the flight departure and arrival times, the number of stops and the duration of each, and the total flight time. The following websites may help you research good-value flights:
http://www.bookingbuddy.com
http://www.webjet.com
http://iwantthatflight.com.au/
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7 Using the Universal Currency Converter website (http://www.xe.com/ucc), calculate the conversion rate of one Australian dollar into your nominated country’s currency. Include this information in your report. If you are quoted prices for any part of your travel in your chosen country’s currency, convert it to Australian dollars using this rate. Record your calculations.
Example:
Live rates at 2010.06.17 02:11:00 UTC
1.00 AUD = 2.81287 MYR Australia dollars Malaysia Ringgits
8 Using the following websites (and any others that you find are useful) and brochures from travel agents, research accommodation for each destination for your selected dates. List two to three possible options for each destination. Record the price (in Australian dollars) for two people per night for each hostel, hotel, guesthouse, apartment or resort you choose. Check whether breakfast or any other meals are included in the price.
Useful websites:
http://www.expedia.com
http://www.tripadvisor.com
http://www.quickbeds.com
http://www.ratestogo.com
http://www.wotif.com
http://www.lonelyplanet.com
9 Investigate the cost ($A) of airport transfers to your accommodation for two people. Record the costs.
10 Investigate the transportation options between your chosen destinations. Remember to include at least one internal flight and one bus trip (if appropriate). Record the airline, travel time and cost ($A) of your internal flight. Similarly, investigate and then record the name of the bus company and the cost ($A) of a bus trip between the destinations.
11 Use the website http://www.travelinsuranceaustralia.com.au or another Australian travel insurance website to obtain three quotes for international comprehensive travel insurance for the duration of your holiday. Click on International Travel Insurance in the left panel on the home page. Enter your dates, ages, region you are visiting, duration of the holiday (number of days) and select ‘Days’, ‘Weeks’ or ‘Months’. Then click Find Travel Insurance. Choose the best policy for you. (Note that you can save on the premium by selecting duo cover, which applies to people travelling with another person.)
In your report, include details about the insurer, the type of policy, the price and the cover provided.
12 List and provide photos of the main tourist attractions of the country you have selected.
13 Investigate the location, opening times and entry costs ($A) of at least three tourist attractions or activities you do not want to miss. Investigate another three tourist attractions that offer free entry.
Useful website: http://www.tripadvisor.com > Trip Ideas
14 Create a spreadsheet using MS Excel or a table using MS Word that lists the various costs for each component of the holiday, including airfares, accommodation, transport, tourist attractions, meals, souvenirs, contingencies (unforeseen events), and any other expenses. Calculate the total cost per person. Remember, you cannot spend more than the money you have saved, so the total cost must not exceed $5000 per person.
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Have you completed the following task before you hand in your assignment?
Planning your ideal holiday
Tasks Tick if complete
1. Decide on country you would like to visit
2. Print map of your chosen country
3. Plot route on map
4. Travel days
5. Travel dates
6. Price of airfares
7. Calculate conversion rate of one Australian dollar
8. 2 or 3 options for each destination
9. Cost of airport transfers
10. Transportation options between your chosen destination
11. Travel insurance
12. Photos of main tourist attractions
13. Spreadsheet of various costs
14. PowerPoint presentation to present to class
Bon voyage!
Due Date:
We will start presentations on that day.
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SHARE MARKET WORKBOOK
1. Create a glossary and define each of these terms. You can find a glossary on
http://www.asx.com.au/glossary/index.htm and use the KEY in the share tables of the daily
newspaper.
Brokerage
Dividend
Shareholder
Bonus shares
Capital gain (or capital growth)
Blue chip share
Speculative share
All Ordinaries Index
Ordinary Share
Risk
Stockbroker
Franking credits
Move price
Turnover
P/E Ratio
Dividend Yield
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Preference Shares
Earnings per share
Now, write a paragraph of between 100 and 200 words about investing in shares. Give your paragraph a
title and use as many of the glossary words as you can.
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2. Study the Share Market information for a day’s trading from a newspaper and read the key
explaining the meaning of the heading for each of the columns.
a. Explain the meaning of the close price and the high/low columns.
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b. What is the difference between the buy and sell price?
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3. Using the share market newspaper tables and the ASX website http://www.asx.com.au complete the table below
Data ASX code Business
The closing price of Harvey Norman
The Daily high of Macquarie Group Limited
The 52 week high and low for Orica Limited
The last Dividend for Billabong International
The turnover for Wesfarmers (daily)
The move for Caltex Australia Ltd
4. What factors do you think could have made the prices move from one day to the next and from one year to the next? __________________________________________________________________________________
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5. List five companies that you recognise the name of. List their prices and industries.
Company Industry Last sale + or - Div yld P/E
ratio
52 week
high
52 week
low
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6. Study the Share Market information of the companies in the table above and identify which company had the:
Highest closing price
The best Dividend yield
The highest daily move
The best P/E ratio
The lowest recorded turnover
The lowest selling price
7. Explain how the saying ‘Don’t put all your eggs in one basket’ relates to the share market. __________________________________________________________________________________
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8. Explain the term ‘bull market’ and ‘bear market’. The current market is a…………….?
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9. Why is share market trading more attractive when tax benefits are taken into account.
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10. Identify the role of a stockbroker and explain the process by which shares are bought and sold.
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Lesson 4 – Why do share prices change?
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Case Study Emma’s weekly budget ‘The budgeting habits that Emma is forming now will help her in the future to successfully manage her finances…’
Emma is 16. She goes to school, and also works at the local supermarket two or three times per week. She
has signed a part-time contract that requires her to work a minimum of 10 hours a week. She may pick up
an extra shift over the school holidays. If she works only 10 hours a week, she receives $115 per week after
tax. Emma plays netball on a Wednesday night and pays $7 per game. She also has a mobile phone plan that
requires her to pay $49 per month. Her friend Sinead‘s birthday is next week and she needs to buy a
present. At the end of the year Emma is travelling to Bali with some friends for a holiday. Emma would like
to meet these short- and medium term goals with the income that she has. She will need a budget to allow
her to attain these goals. Her weekly budget may look something like this:
Income
Income
Supermarket wage $115
Expenses
Netball $7
Mobile phone $13
Bali trip $50
Surplus/Deficit $45
Emma has a surplus of $45 a week. Even though her mobile phone bill is due monthly, she sets aside $13 for
this each week. She is also putting $50 aside each week to go towards her holiday in Bali. Emma reviews her
budget every weekend once she knows how many shifts she has for the following week, and keeps in mind
any upcoming events. The budgeting habits that Emma is forming now will help her in the future to
successfully manage her finances as her income and expenses start to grow. Should you start budgeting now?
Learning Activity Julian works part time at the supermarket. He earns $195 a week. He also referees a local basketball match
for which he earns $29 a week. He pays for his own entertainment, transport and clothes. On average he
spends $7 on each school day at the school canteen. He has worked out that if he saves $20 a week he can
buy the clothes he needs. He has an arrangement with his parents that he will pay $40 a week for board.
Julian also spends about $30 per week on mobile phone bills.
Questions: 1. What is Julian’s total income per week? 2. He spends 10 per cent of his income on transport
________________________________________ How much is this? ________________________
3. Create Julian’s budget using the data above, showing his income and expenses per week. This can be completed in
the table below
Income Expenses
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4 After he has paid his regular expenses and put money aside for clothes, how much does he have left for
entertainment? _______________________
5 Do you think he would be able to save $10 a week towards a new widescreen TV? Give your reasons.
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6 Brendan works part-time. He earns $120 per week.
His weekly expenses are:
■ entertainment: $45
■ travel: $18
■ lunches: $25
Brendan thinks he can save for four weeks to buy an MP4 player for $125. He would like to buy his girlfriend a DVD
for $25 next week. Will he be able to achieve these goals? What do you advise him to do?
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Paying income tax
Everyone in Australia who earns income must
pay income tax. The income tax system for
workers, the people who work for someone else,
is known as PAYG (pay as you go). Under this
system, the employer automatically takes out an
amount of money from each worker‘s pay. The
money is then sent to the Australian Taxation
Office (ATO).
Under the pay-as-you-go system, the more you
earn, the higher your rate of tax will be. The way
that marginal tax brackets work is that you pay
tax depending on the amount of income you earn
that is taxable. For example, you may have a
casual job for which you earn $100 per week,
which is $5200 for the year. If $5 tax is taken out
of your pay each week, this will add up to $260
for the year. When you submit your tax return
you will get all $260 back. Your total tax bill will
be $0 because you are under the tax-free
threshold of $6000, which is the amount below
which you do not have to pay tax. If you earned
$6001 for the year and have no deductions, how
much tax will you pay? You would be in the 15
per cent tax bracket. Does that mean you pay 15
per cent of your total taxable income? No. You
would pay 15 per cent on every dollar over $6000,
but no tax on all the dollars earned under $6000.
Your tax bill would be 15¢. The following table
shows the income tax rates for 2009–10. It does
not include the Medicare levy of 1.5 per cent.
People in particular circumstances may have tax
offsets to reduce the tax payable.
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Figure 2.15 Every Australian who earns an income must fi le a tax return every year.
This is how you calculate the tax for an income of $75,000 a year
Taxable income
Tax to be paid
Formula explanation
$6,000 x 0c 0 No tax on the first $6000
$31,000 x 15c $4,650 15C for every dollar between $6,001 and $37,000
$38,000 x 30c $11,400 30c for every dollar between $37,001 and $80,00 ($75,000)
Total tax for income of $75,000
$16,050 Average tax paid on each dollar earned = $15,740 divided $75,000 x 100 = 20.98%
Now you need to calculate the tax for an income of $100,000 a year
Taxable income Tax to be paid
Formula explanation
$6,000 x 0c 0 No tax on the first $6000
Note: This calculation does not include the medicare levy or any tax offsets or deductions
PAYG payment summary
At the end of each financial year you are given a PAYG
payment summary by your employer. This shows the
amount of money you have earned during the year and
the amount of tax already deducted from your income
and paid to the Tax Office (tax instalments). The
income shown on the PAYG payment summary may
not be your only income. Many people receive other
income such as interest on money in the bank or
wages from a second job. This should all be declared to
the Tax Office. The total amount of money a person
earns from all sources is known as gross income. If
your gross income is more than $6000, you must pay
income tax.
Tax deductions
Before calculating the amount of tax that has to be paid,
each taxpayer is allowed tax deductions. A tax
deduction is a legitimate way of reducing the amount of
tax that needs to be paid. A tax deduction is something
you have paid for that you use in earning your income.
For example, the purchase of textbooks by teachers is
a tax deduction, as is the dry cleaning of uniforms for
restaurant workers. Once all deductions have been
taken into account, what is left is taxable income,
which is the amount used to calculate the tax that
needs to be paid.
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Tax file number
A tax file number is issued to everyone who pays tax.
This number stays the same and is entered on each tax
return.
The Tax Office uses your tax fi le number to:
■ identify you
■ prevent any confusion between yourself and another
person with the same name
■ locate your file
■ check back to previous tax returns to see if there
are any discrepancies
■ try to prevent tax evasion and tax cheating.
The Tax Office receives information from employers,
banks, building societies, credit unions and government
agencies (such as social welfare agencies). This enables
the Tax Office to ensure that everyone is paying the
necessary tax.
TAX FILE NUMBERS FOR
STUDENTS
If you are a high school student, the quickest and
easiest way for you to get your tax fi le number is to
use the secondary schools tax file number
program. Applying this way is easy because your
school verifies your identity. You do not need to
provide any proof of identity documents. Check with
your school to see if they are part of the program.
When you start a job, your payer (employer) will give
you a tax file number declaration form to fill in.
Centre-link is also a payer and they will give you the
form if you apply for payments. If you do not provide
your employer with your tax fi le number, then your
employer must withhold 48.5 per cent, plus the
Medicare levy, from any payment to you.
Source: ato.gov.au
Learning activity 2.12
Questions: 1 a Calculate the tax payable on the following incomes. The
calculations do not need to include the Medicare levy or any
tax offsets.
Assume there are no deductions.
■ $7274
■ $35 000
■ $60 000
■ $80 550
■ $499 500
■ $1 000 000
b Do you think that the tax payable on these amounts is
fair? Explain.
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2 Why do we have a tax-free threshold?
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3 Why is each taxpayer allowed tax deductions?
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4 Research the Medicare levy. Why do we have it?
Does everyone need to pay it?
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INVESTMENT
OPTIONS
1. Investment – What is it? What does it mean to invest?
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2. What are some reasons why people invest?
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3. What are some things that you know people invest in?
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4. What are your savings goal (short term 1-2 years and long term 2-10 years)
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1. YOUR INVESTMENT PROFILE - Determine your investment goals
Your investment profile will help you work out the type of investment you should consider. There are four
factors in your investment profile:
Duration - How long do you want to invest for?
Returns - Do you want income or growth?
Liquidity - Do you need to get to your money easily?
Risk - Understanding the nature of risk involved in different forms of investment and taking account
of your views on risk.
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It might be that you have a couple of different investment goals. You might be saving for an overseas holiday,
and saving for your retirement at the same time. You'd have separate investment profiles to match each goal,
and the best investments for you will be different in each case.
Duration - Duration means how long you want to invest for.
Short term - 1 to 3 years
Medium term - 3 to 10 years
Long term - over 10 years
Money you are saving to go overseas in two years‘ time is a short term investment. So you need to make
sure you'll be able to get it when you need it. Money you are putting away for your retirement can be a long
term investment. Over a longer period of time you'll be more interested in 'capital growth'. This is when the
value of your investment (your capital) grows. If you invested $100,000 in shares last year that are worth
$110,000 this year, your capital growth is $10,000, or 10%. It's common to have different investments of
different durations.
Returns - Income or growth?
To work out the type of returns that will suit you, ask yourself if you're more interested in income or
growth.
Do you want to use the money your investment earns as income to live off during the duration of the
investment? Do you want to reinvest it with the original lump sum, and grow your lump sum as much as
possible? If you need short term income from your investment, it's probably best to put your money where
you can guarantee how much money it will earn - such as a bank deposit paying a fixed amount of interest
for a set period. If, on the other hand, you don't need the income in the short term and you want to grow
your lump sum as much as possible, you could consider investments that don't guarantee the return from
year to year, such as shares.
Liquidity
Liquidity means the speed you can convert your investment into money before the end of your investment
period, without taking a loss.
High liquidity investments mean you can get at your investment anytime, without losing any of your
investment. A bank savings account is the classic example of a high liquidity investment.
In a low liquidity investment, it may take time to find a buyer at a price which is acceptable to you. Property
is usually a low liquidity investment. Shares in public companies generally have a reasonable liquidity. An
interest in a forestry syndicate will probably have low liquidity. Some investments maybe illiquid - you can't
get your money until a certain date or event (e.g. retirement). It is important you understand and are
comfortable with the risk
Risk
Risk and reward is the classic investor's balancing act. The higher the risk you take the higher returns you
could receive, but the more chance you have of taking a loss.
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With a low risk investment, you generally know the return you will receive right up front. A low risk
investment would be a bank savings account - you know the return (the interest rate), but compared to
riskier investments, like shares, it isn't great.
Higher returns are only available with higher risk. The risks come in two types, volatility, which is the
possibility that the value of your investment will go up and down, and performance, which is the possibility
that the investment could be a flop and you lose all or part of your money. Or, the investment gives you a
lower return than you expected or needed. If you are considering high risk investments, you can balance
your risks with other investments in lower risk areas, like short term deposits or cash and bonds.
You can generally recognise high risk investments because the potential returns are also sky high (the
promise of too-good-to-be-true returns is probably just that, not true).
5. What 4 factors do you need to consider when choosing an investment option. Briefly summarise
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2. BUDGET – paying taxes
How much have you got to invest? Whenever you earn income – even by interest in savings accounts and
profits/gains on investments you sell – that income will be taxed by the government.
6. How much will you have to invest? What is a budget?
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7. Now that you are earning a wage you will be paying tax!
a/ Define gross wage ______________________________________
b /Define net pay _________________________________________
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8. a) See if you can find the following current tax rates at http://www.ato.gov.au/ Go to Individuals
choose x and then select income tax. Select Individual Income tax rates and complete the table
below:
Taxable income Tax on this income
$0 – $6,000 Nil
$6,001 – $37,000 …… for each $1 over $6,000
$37,001 – $80,000 $4,650 plus ……..for each $1 over $37,000
$80,001 – $180,000 $17,550 plus ……. for each $1 over $80,000
Over $180,000 $54,550 plus ….. for each $1 over $180,000
b) Select capital gains tax. Define capital gain and note the rate of tax paid on capital gain.
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3. INVESTMENT OPTIONS – what to put your money into!
TERM DEPOSITS
Term deposits are offered by most banks and financial institutions. They are designed for
people who do not need immediate access to their money and are happy to have a level of
interest paid that is just a little higher than a normal bank account. Once invested, the money
is usually not able to be accessed until the term (the time period for which the money is
invested) is up. There is very little risk in this type of investment, which means the returns are
not high, but they are steady for the life of the deposit.
BONDS
Bonds are offered by government and semi-government organisations. By investing in bonds you are lending
money to the government. In return you receive a fixed rate of interest until a specific date when the bond
matures. Investing in bonds carries a very low level of risk.
PROPERTY
Another investment that you could make is in property; that is, houses, buildings or even factories. There is
risk involved with this type of investment as well. The property that is purchased needs to have
people using it for you to get a return from the rent they pay. You will also make money if the
value of the property increases while you own it. You may not have enough money to purchase a
property outright, so you will need to take out a mortgage. A mortgage is a loan from a bank to
buy a house and the bank charges interest on the money borrowed. The bank holds a financial
interest in the house during the time of the mortgage. The money borrowed is gradually paid back
to the bank. If you are buying an investment property, the rent from the tenants (people renting the
property) will contribute towards the cost of borrowing the money. There are also small tax concessions
for people buying investment properties that offset some of the cost of borrowing the money and repairs to
the property.
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SHARES
If you were to purchase shares in an organisation, you would, in effect, own part of
that organisation. The share-market, the market where shares are bought and sold,
can be quite volatile. The risk is that the company you hold shares in could fail and
you lose some or all of the money you invested.
Shares can be a good investment for two main reasons. The first is that you can
make money if the value of your shares increases. This is unlikely to happen
overnight, and investing in the share-market is usually seen as a long-term investment to reap the full
rewards on offer. The other benefit of owning shares is that you receive part of the profit the organisation
makes. This is paid in what is called a ‗dividend‘. Your dividend is calculated based on the number of shares
that you own and the amount of profit to be shared among the shareholders. This could be hundreds or
even thousands of shareholders. Before investing in shares there are many questions about the company you
will need to consider. Will the organisation‘s value increase? Will it make a profit? Will it survive difficult
economic times?
Shares are investments that represent ownership in a company. Investors actually own a part or ‗share‘ of
the company. Companies issue shares to raise money, and then use the money raised to produce products
and services. A company‘s share price goes up and down depending on how it is doing. The difference
between the price you buy shares at and the price you sell your shares at is the profit or capital gain.
Imagine you buy 1000 shares at $5 per share (a total investment of $5000). If the share price fell to $4 per
share and you had to sell at this price, you would make a loss of $1000. However, if the share price rose to
$6 per share, and you sold at this price, you would make a profit or capital gain of $1000.
Because share prices increase and decrease (fluctuate), they are riskier investments and should be seen as a
long term investment rather than a short term opportunity.
MANAGED FUNDS
Google ‗managed funds definition‘ or select http://www.businessdictionary.com/definition/managed-fund.html
9. What are managed funds?
______________________________________________________________________________
______________________________________________________________________________
10. Who do you think would choose a ‗managed fund‘ form of investment? Why?
______________________________________________________________________________
______________________________________________________________________________
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4. DIVERSIFICATION
Understanding the product range
If you're serious about learning more about investing, this section gives you a more in-depth overview. You
can find out more about diversification, different returns from different product types, the importance of
small differences and determining the real rate of return.
Good investors don't put all their eggs in one basket. They develop a diversified portfolio of investments.
This means they have investments which are spread across the four main asset classes - short term deposits,
bonds, properties, and shares. These days, with the opening up of global financial markets and new
technology, you can invest relatively small amounts in some of the world's most successful companies. At the
same time you can automatically have a spread over hundreds of different investments.
You could make endless combinations to spread your investment risk. But the good news is that the savings
and investment industries have made it easier for us, by developing a range of funds which combine asset
types and have different levels of risk, to suit all tastes.
There is a huge array of managed funds or investment trusts. They vary, but should all have people with
expertise and knowledge who pool your savings with others, and then invest the total pool over a range of
products or companies.
No matter what type of saver or investor you are, you can find at least a couple of funds that match your
investment profile. Your investment profile includes what you need in terms of duration, liquidity , returns
and risk.
In each asset class there are many types of products:
How the four asset classes have different levels of risk and returns:
The chart shows that short term deposits are the least risky, but give the
lowest return over time. Whereas shares are the most risky, but in the long
term should give you a higher return.
How the right investment mix for you depends on your risk
profile and when you would want to cash up your investment:
By mixing the four asset classes as well as mixing by industry, country and
other features, you can see how fund managers and investment advisers can
produce a huge variety of investment schemes with varying degrees of risk,
duration, liquidity and types of return. The trick is to find out which mix suits you.
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RISK AND RETURNS
Whenever you invest, you are accepting a level of risk. The risk-return relationship means that the more
risk you take with your money, the higher return you are likely to receive. Likewise, the less risk you take
with your money, the lower return you are likely to receive.
Potential risks:
Mismatch risk – the investment you choose may not suit your needs and circumstances
Inflation risk – That the purchasing power of your money will be eroded by inflation
Interest rate risk – The risk that changing interest rates will reduce your returns or cause you to
lose money
Market risk – The risk that movements in the asset markets (share markets, bond markets etc)
reduce the value of your investment or returns.
Market timing risk – the timing of your investment decision might expose you to lower returns or
capital loss
Risk of poor diversification – the poor performance of a small number of assets significantly affects
your total portfolio
Currency risk – the risk that currency movement will affect you investment
Liquidity risk - the risk that you may not be able to access your money quickly or cheaply when you
need it.
Types of investment include cash, bonds, property (land, buildings, etc.), shares and collectibles (unique/rare
items). The diagram below ranks the level of risk involved with these investments.
11. Which type of investment has the highest risk?
12. What capital gain have you made to this date on your share portfolio? ______________
Determining the real rate of return
The key factor determining the real rate of return is the mix of growth and income assets. This is called
'asset allocation'. In the long term, growth assets should produce a higher return than income assets, but the
returns from growth assets are more volatile and involve greater risk.
The return on income assets is fairly constant from year to year, whereas growth assets may provide a high
return one year and a loss the next. But over time growth assets should provide a higher return. The return
comes from both income and capital gain.
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Taxation, investment management fees and inflation all affect your real rate of return (your return after the
cost of these factors has been deducted). So when people tell you about returns, make sure you know if all
these factors have been considered and compare the fees and tax position of different products.
Be wary if you're advised that a balanced portfolio can achieve average long term returns well above those in
our chart. Some parts of a balanced portfolio may give higher returns but will probably be offset by lower
returns in other parts.
Remember no-one can guarantee what future returns will be.
A higher risk means a greater chance of losing money in any given year, but the possibility of achieving higher
returns over the long term.
Don't believe anyone who says they can give you high returns every year without very high risk.
13. After reading the above notes summarise the major investment types described
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
14. Why is it important to develop a diversified portfolio?
________________________________________________________________________________
________________________________________________________________________________
15. What is the significance between the relationship between risk and return? Give an example.
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
16. Explain two forms of investment that are low-risk.
________________________________________________________________________________
________________________________________________________________________________
17. Do you think shares are a high-risk or a low-risk investment? Explain.
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
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18. What are your feelings about property rather than shares as an investment?
________________________________________________________________________________
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CASH and INTEREST RATES
If you put your money into a savings account with a bank or financial institution you
will earn interest. Depending on how much and how accessible the money is the
interest rate will vary.
What is the current interest rate? Cash rate!
Interest is often referred to as the price of money. You receive a return from the bank when you put your
money into a saving account. If you want to borrow from the bank and use their money the interest
becomes a cost. (Credit card interest)
19a. Visit two banks. Find the interest rate and fees associated with the following accounts:
■ Simple bank account
■ Savings account - online
■ Term deposit. – 12 months $10,000
Bank Simple bank account Online savings
account
Term deposit
12 months 10,000
19b. Imagine you have been given $1000. You decide to put it into a bank for two years. Which type of
account would you choose, visit http://www.infochoice.com.au/banking/savings-account/online-savings.aspx
Give reasons.
________________________________________________________________________________
________________________________________________________________________________
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________________________________________________________________________________
________________________________________________________________________________
_______________________________________________________________________________
20. Define interest rates as a return and as a cost.
________________________________________________________________________________
________________________________________________________________________________
21. It is your 18th birthday. Your parents have promised to give you $5000 towards a car or a trip
overseas. You‘re not even close to getting your license or going overseas, so you‘re not sure what
you want to do with the money. Right now you‘re focused on completing the last 18 months of your
degree. What will you do with your money while you make up your mind?
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
COMPOUNDING INTEREST
22. Define compounding interest.
_____________________________________________________________
23. Using the interest rates listed in the table below, fill in the compound value of $100 for each of the
blank time periods listed.
Google interest rate calculator or go to www.moneysmart.gov.au go to tools and resources then click on
the compound interest calculator and complete the table below
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Today 1 year 2 years 5 years 10 years
4% $100 $104 $108 $122 $148
5% $100 $128 $163
8% $100 $147 $216
10% $100 $161 $259
24. . Study the ‘Make a Million’ example. How long will it take you to make a million from
investing $2000 at 10%? ____________
25. Calculate how long it will take you to make $10.000 if you invest you savings of $800 today at 5%
interest rate? Use the ‗compounding interest‘ link provided at www.moneysmart.com.au go to tools
and calculators and click on compounding interest calculator.
CREDIT CARDS and Bank Accounts
What type of bank account do you have currently? Is it earing you any interest? What features
does it offer?
26. Investigate http://www.creditcardfinder.com.au Answer the following questions:
a/ choose two credit cards that are high on the list of ―best‖ credit cards. What interest rate do they
charge?
1/_________________________________________
2/_________________________________________
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b/ Find a credit card that has no annual fee. Describe what is offered with this card.
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
c/ What is the advantage of having a gold or platinum credit card?
________________________________________________________________________________
________________________________________________________________________________
d/ What is the interest free period? Find two cards that have 55 day interest free periods?
________________________________________________________________________________
1/
2/
e/ Find a debit card advertised and explain the advantages offered by this card
________________________________________________________________________________
________________________________________________________________________________
f/ Why would a person consider a debit card instead of a credit card?
_______________________________________________________________________________
________________________________________________________________________________
TIME VALUE OF MONEY
This means that money is worth more now than it is in the future because the value of money falls as prices
rise.
27. Define inflation.
_________________________________________________________________________
28. a. What would you do if somebody offered a choice between a $100 payment today or a $100
payment in one year‘s time?
b. Explain an advantage and disadvantage of each option.
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_________________________________________________________________________
_________________________________________________________________________
29. Find out Australia‘s inflation rate at http://www.rba.gov.au/ = ________ %
Stephanie is about to negotiate with her employer for a pay rise.
What % increase should Stephanie aim for to maintain the purchasing power of her income? Why?
_________________________________________________________________________
_________________________________________________________________________
30. Study the average investment returns as reported on the following link:
http://www.asx.com.au/about/pdf/asx_russell_long_term_investing_report_2006.pdf
List the highest performing to the lowest performing investment type over the past 10 years. Note
the gross average returns for each of the 6 investment types.
1.______________________________________________________________________________
2.______________________________________________________________________________
3.______________________________________________________________________________
4.______________________________________________________________________________
5._____________________________________________________________________________
6.______________________________________________________________________________
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Savings Savings represent the amount of your income
that is not spent straight away. It may be kept for
spending in the future or it may be invested to
earn interest.
People save for many reasons; some of those
reasons are outlined below.
Some things you want to buy are outside the
reach of your income. Saving allows you to
build up funds to the amount necessary to buy
these things in the future.
You may be unsure of what you really want to
buy now, and so put the money aside until your
choices become clear.
Your purchase may require a long-term loan,
over many years, and saving is a way of gaining
the deposit to show a bank that you are able to
manage your money properly.
You may save money for a ‗rainy day‘. If you are injured, sick or lose your job and are
unable to earn income, you will want to have some savings to call on. You may save for when you
retire. Spending patterns can vary according to personal circumstances. For example, a sudden loss
of income, a health scare or a promotion at work can alter the percentage of income saved.
Other factors, such as the person‘s age, their wealth or place of living, can also play a part.
Sometimes spending levels may drop when economic conditions are unfavourable and there
are high levels of unemployment.
1. What reasons do people have for saving some of their income?
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2. Why do some people save a higher percentage of their income than others?
3. Why do people rarely 'hide their savings under their bed' anymore?
4. Explain how the following factors affect saving levels.
a Age
b Wealth
c A health scare
d A promotion at work
e Loss of job
5. How do sales advertisements encourage people to spend? Should they resist the
temptation?
Why is saving important?
Savings allow a person or business to buy more expensive items that cannot be afforded in the
short-term, for example, an individual could use savings to pay for annual car insurance, a holiday or
a wedding. They may also provide for emergencies, e.g. to cover unexpected illness or house repairs.
For a business, savings can help it through periods of low income such as when a factory is closed
for holidays.
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A big advantage of savings is that they provide funds for investment
Consumers face two basic choices with income - spend it all or save some of the income. Income
spent is gone, and cannot be used in the future. Income saved is available for future spending or
investing
6. Explain why is saving important?
What is the best savings account for me?
Savings for short-term or emergency goals, e.g. rent or car repairs need to be accessible, and are
therefore usually kept in an account available at a branch of the bank with at-call access by ATM or EFTPOS. Interest rates for this type of account are generally lower.
Financial institutions usually offer a higher interest rate for term deposits, which limit the customer's
access to funds for a specified period. Individuals and businesses need to select a savings account
appropriate to their purpose. Separation of accounts can lessen the likelihood of funds needed for a specific purpose being used for something else.
7. Describe the best saving account for individuals or business if they wish to access
their money quickly?
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Read the following case study that outlines the right bank account for their needs.
8. CASE STUDIES: Can you help manage
9.
10.
11.
12.
13. ances?
8. CASE TUDIES: Can you help manage these personal finances?
Bobby
Bobby loves to chat to her friends at all times of the day. She uses her mobile phone constantly to
organise her busy social life. She received a shock when her first phone bill arrived for $2000. As
Bobby didn‘t have the cash to pay this bill she took her friend‘s advice and got a credit card to pay
off the phone bill. Bobby continued to use her phone constantly and ran up a further $3000 on her
mobile phone bill. She obtained a second credit card to pay this debt. Bobby is worried her parents
will find out about all her debts and doesn‘t know how she will pay off the credit cards.
a. Bobby needs your advice on what to do.
Gemma
Gemma loves to shop and has lots of female friends who also enjoy shopping. Whenever Gemma is
down she always uses a bit of ‗retail therapy‘ to put her in a better mood. New clothes and CDs
always bring a smile to her face. This is a short‐lived feeling, though, as the credit card bill always
arrives the next month and reminds her of all her purchases. Gemma has recently broken up with
her boyfriend Greg and is feeling a bit depressed. She thinks there is only one solution: to go on a
spending spree at Chadstone to make herself feel better.
b. Gemma needs your advice on what to do.
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Investing
Investment means different things to different people. Some people invest in things that have a
personal significance to them, others look at investment as a hobby
that they work on every day, and some see an opportunity and put their money into an investment
to gain the greatest possible financial return. Whatever your reason for
investing, there are a variety of elements that you need to take into consideration and options that
you have.
Your reason for investment may reflect the stage you are at in your life. For example, the reason
that someone who has just commenced employment will invest will be very
different to that of someone who is contemplating leaving the workforce at the end of his or her
career.
Many of the decisions around investing relate to risk and return. Risk is assessed by what the
individual is prepared to put forward, and the degree to which it may not be
returned. Return relates to how big the payoff will be. The general rule is that the greater the risk
the greater the possible return.
Impact of savings and investment on the Australian economy
The ability to save means that a person‘s income (money coming in) is greater than their expenses
(money going out). While some individuals within the Australian economy are able to display
excellent money management skills and have the ability to save on a regular basis, this behaviour is
not widespread. Many Australian consumers prefer to spend all their income by living for today and
not being concerned with their long-term financial situation.
Your expenses should be less than your income, otherwise you are living beyond your means.
However, while this can have negative consequences for the individual (in the form of higher interest
charges or falling bank accounts), what are the implications for the Australian economy? [3.13]
summarises some of the implications of Australia‘s poor saving record.
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14. Explain the impact of saving and investment on the Australian economy?
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
Saving and investing are not the same. A person who is saving is putting away any excess money to
use at a later date. In contrast, investing is either using your own money, or money that has been
borrowed, with the intention of making more money. Investing is a more active process than saving
money.
15. Outline the difference between saving and investing?
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
◗ Investing in Property Investment is using money to purchase assets
(such as property or shares) with the
expectation of making a profit—referred to as
a capital gain. A capital gain will occur if the
investment is sold at a price higher than its
original purchase. In contrast, a capital loss
will occur if the investment is sold for less
than its original purchase price.
Property investment
Huan purchased an investment property five
years ago for $200 000. It sold last month for
$350 000. This represents a capital gain of
$150 000. This capital gain of $150 000 is
subject to a tax, referred to as capital gains
tax, and therefore must be declared by Huan
when he lodges his annual tax return.
Many types of investment opportunities are
available in Australia. Some of the more
common ones are property (real estate),
superannuation, shares and interest earning
investments, such as bank term deposits.
Investment options are now very broad and
can even include items such as artworks,
classic cars and sports and music memorabilia.
Depending on personal preferences and
tolerances to risk, people will choose the
investment type that they are most
comfortable with and from which they expect
a good return.
Property
When people invest in property, or real
estate, they could be investing in residential
property such as houses and apartments,
commercial property such as shops, or even
industrial property such as factories. For many
Australians, buying a home is a priority, and if
the purchase is well made, in the long term
this could be a good investment.
There are many costs when buying a property, including bank fees, legal fees, valuation charges, as well as
government taxes such as stamp duty. Despite these costs, many people have benefited from strong
increases in the prices received for property. Both in 2007 and 2009, Melbourne property prices increased
substantially as demand for housing was greater than the supply of houses available for sale. This increase in
house prices has enabled many homeowners to build up enough equity to buy more real estate. In fact,
nearly one in five Australians own more than one property.
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Once a person has saved a deposit for a property, they will need to borrow the balance from a bank or
another financial institution. This home loan is often referred to as a mortgage. If someone already owns
their own home and wishes to purchase an investment property, they will usually still take out a bank loan
for this purchase. This is because interest payments on investment loans are tax deductible. This is referred
to as gearing. Gearing is a sensible strategy when the investment market is rising as someone else‘s money
is being used to make capital gains. Of course, losses will be magnified if the investment goes down in value.
[3.1] There are advantages as well as disadvantages to owning an investment property
Advantages of owning an investment
property
Disadvantages of owning an investment
property
There are many generous tax benefits
such as deductions for interest payments
In some cases a bad tenant may cause
damage of the property could become
vacant
Over time more equity is built up that
helps secure the owners financial future
There are many transaction fees involved
in buying property in the form of bank
fees, government taxes as well as ongoing
fees such as rates and insurance that must
be paid regularly
Provides both an income stream as well as
capital gains
Property needs to be maintained
Location, location, location
There is a saying in real estate that when buying property, the most important criterion should be to choose
the best location. To achieve better long-term returns on property it is best to buy a property that:
◗ is close to the city (ideally within 8 kilometres of the central business district) as these tend to go
up in value at a faster rate
◗ is close to good schools, cafés, shopping centres and public transport
◗ has views, such as of the beach or of the city, as such properties will usually increase in value at a
faster rate.
Choosing a property with unique features, such as timeless architecture (as well as being structurally sound)
is also a wise move. Most importantly, thorough research should always be done before any property
investment decision is made.
Young first home buyers—Help is at hand!
Buying your first home is a great investment. However, saving enough deposit to buy your first home takes a
lot of hard work and sacrifice. Most banks require a deposit of at least 5% of the purchase price as well as
enough money to cover additional costs such as stamp duty, legal fees, removalist costs etc. To make things
a little easier, the federal government launched the First Home Saver Account to encourage young people to
save for their first home in 2008. The accounts are available from selected banks and credit unions and are
designed to boost savings specifically for a home deposit. By depositing money in this special account the
government will add an additional 17% of the amount deposited up to $5000 per year as well as offering
lower taxes on money in this account. On top of this, eligible first home buyers can also receive at least
$7000 in the form of the
First Home Buyers Grant that can be put towards the property purchase. www.firsthomesaver.com.au
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Glossary
Capital gain: when an investment asset is sold for more than its original cost
Capital loss: when an investment asset is sold for less than its original cost
Note that capital gain is not assessed against a person‘s home, only against properties that are investments in their own right.
Stamp duty: a tax, payable to the government when purchasing assets such as houses and motor vehicles
Equity: the sum of a person‘s assets, for example, in a house, less the debt owing on the asset
Mortgage: a sum of money borrowed from a bank or other financial institution, usually to purchase real estate—ownership of the investment
only transfers to the investor when the mortgage is paid out in full
Gearing: borrowing money for an investment, such as property or shares
Questions: RESIDENTIAL PROPERTY
Housing property Investment
http://imperator.echoice.com.au/mortgage/home_loans?pn=/info/home_loan_calculators/index.html
http://www.yourmortgage.com.au/calculators/homecost/ http://www. firsthome.com.au
1. a. What is the first home buyers scheme? Is it still available?
______________________________________________________________________________
_____________________________________________________________________________
b. What others costs do you have to pay when investing in residential property?
______________________________________________________________________________
_____________________________________________________________________________
c. Find the median housing price for Melbourne home property investment.
Compare this medium price to Sydney and Perth‘s medium price.
______________________________________________________________________________
______________________________________________________________________________
d. Describe the recent trend in Melbourne‘s home property market.
______________________________________________________________________________
2. Read the advertisement and identify any potential positive and negative features of this property as an investment. Do you
believe this property would make a good long-term investment? Give reasons for your answer.
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________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
REPORT:
3. Working in pairs, research two potential investment property purchases.
a) The requirements of each property are: • Property 1: you can spend up to $400,000 to find a one-bedroom apartment to purchase in inner
Melbourne (consider suburbs such as Prahran, South Yarra and Richmond); you have a
$50,000 deposit for this property and must borrow the rest.
• Property 2: you can spend up to $350,000 to find a house as an investment property to rent out in Ballarat; you
have a $40,000 deposit for this property and must borrow the rest.
To help in your search for each property use The Age real estate section or find a property at either of the following websites:
www.realestate.com.au or www.domain.com.au.
b) Prepare an investment report (of two pages in length) or a poster that provides a detailed
profile of each property that you believe would make a solid long-term investment. a. Describe the features of your property; include size, location, views, extra features. Why
did you select this property?
b. You need to also specify the financials: • your deposit, the purchase price of the property and the remaining balance
• your monthly repayments on the investment loan – how much rent could you charge?
• other costs (such as stamp duty) to buy this property—you can use the loan calculator function on
www.realestate.com.au to complete this
• the assumptions that you are making about your choice.
c. What are the advantages and disadvantages of renting verses buying?
4. What young Australians believe will happen to housing affordability in the next 5 years: [3.2] The survey results from FirstHomeSaver.com.au interviews with young people about house price affordability
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A lot of media attention has been given to the housing affordability crisis because of high house prices in Australia. Go to
www.reiv.com.au and find the average house price in your suburb. How does it compare to last year? Many reasons have
been suggested for high house prices such as the cost of stamp duty, high building costs and the tax benefits of property
investment. Do a little research in your local area, maybe visit a real estate office and speak to a local real estate agent to get
their view on house prices and what they expect to happen to house prices in the future.
Q. Where do you think house prices will be next year? In 5 years time? How is this going to impact your chances of buying your
own home?
______________________________________________________________________________________________
______________________________________________________________________________________________
______________________________________________________________________________________________
______________________________________________________________________________________________
______________________________________________________________________________________________
______________________________________________________________________________________________
Superannuation Superannuation is a compulsory saving scheme whereby employers contribute an additional percentage of an employee’s gross wage into a superannuation fund. Employees can also choose to contribute to this fund, thus increasing the overall amount they will receive on retirement. There are laws in place that determine when you are eligible to access your superannuation savings. If you speak to your parents and teachers, they will tell you that starting a savings program early on in life can mean the difference between a good lifestyle in retirement and having to watch every dollar you spend. You don't have to worry yet! You've got about 50 or so years before you need to think about retiring and accessing your superannuation.
THE GOLDEN YEARS Until recently, the retirement age for men was 65 years of age and 60 years of age for women. The federal government has abolished any age limit on retirement to encourage older workers to remain in the workforce. (Part of the reason for this is that Australia, like many other countries has a rapidly ageing population and a declining birth rate). A person can retire when they choose, but they need to be able to pay for their living expenses once they are no longer earning a wage or salary. When a person retires, they may be able to access an age pension in order to survive. This is an amount provided by the federal government to help an elderly person meet their basic needs. It does not allow for a luxurious or comfortable lifestyle, especially if debts have been accumulated over time. Although the government does provide a pension, it is not always sufficient to maintain a preferred lifestyle. As a result, a person may need to work longer, or sell assets in order to generate the cash flow required. Those who have the financial resources to do so are well advised to plan ahead for retirement, so they can be self-funded retirees. This means putting aside money now (while you are young and able to work) for when you get older and no longer have a regular income. You are given a choice by your super fund as to where you want to invest your money. (see below) Some people choose to invest their money in property, shares, term deposits or managed funds, and these days you can also choose to run your own fund (Self-managed super fund) Although superannuation has been around for more than 50 years, it has only become a major feature of the Australian workplace since 1992. In that year, the federal government introduced compulsory superannuation for employees. This is an account in the employee’s name that puts aside contributions by their employer (and in some cases the employee themselves) to help fund their future lifestyle after retirement. Originally, employers were required to contribute 3 per cent of an employee’s wages into superannuation. Since 1992, the amount employers must put into their employee’s superannuation fund has increased to 9 per cent of the employee’s salary. This legislation as well as other changes to the age pension has meant that more people will rely on their superannuation to finance retirement.
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Example Bree works full-time and earns $600 per week. Her employer would be required to contribute $54 (9% x $600) into her superannuation fund in addition to the $600 she receives.
It is important to note that employees who earn less that $450 per month, such as some casual and younger workers,
do not normally receive superannuation payments from their employer because it is not required by the law.
.
What is superannuation? – put simply its saving for the future
Common superannuation investment options
Type of investment Description
Cash option This is popular with those nearing retirement and those who don’t like taking risks. Under this option, superannuation is invested mainly in bank deposits. This is a very safe option, though returns are usually quite low and are in line with what the banks are offering on bank deposits.
Capital-stable option This option appeals to those investors who like to take a conservative approach. While some money is invested in both Australian and international shares, the bulk of money is invested in cash and Australian bonds. Returns under this approach don’t usually fluctuate greatly from year to year.
Balanced option This is a popular option with those who are willing to accept a small amount of risk in the hope of achieving returns above those offered by the cash option. Under the balanced option, funds are spread through a range of assets, usually including bank deposits, property, Australian shares, international shares and government bonds.
Growth option This option is popular with those who are happy to accept a higher level of risk as a trade-off for the potential of higher rates of return. Under this option, funds are predominantly invested in Australian and international shares where returns can fluctuate regularly. In recent years, returns have fluctuated greatly.
Superannuation funds invest money in a diverse range of investments on behalf of the people who contribute to the
fund. (Industry funds are a group of people from one area ie builders or people in the medical industry) Like managed
funds, the pooling of resources has its advantages. The benefits are that specialised managers are overseeing the
investments. Its primary purpose is to manage the funds under its controls to make the greatest profits to its members.
It is a form of enforced savings for
employees to help fund their lifestyle
needs when they retire permanently
from the workforce.
Its primary focus is providing long-
term savings for retirement
It is subject to a number of restrictions.
For example, employees cannot access
superannuation savings until they reach a
specified age.
For someone who is currently 30 years old
this is 60 years of age.
Many tax incentives are
provided to people who
contribute extra money into
their superannuation fund.
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‘Still working at the future’ – Paul Clitheroe Progress Leader April 19 2011
Plenty of older Australians face a serious shortfall in their super savings, and for many the only solution is to shelve plans of an early retirement. Prior to the global financial crisis, retiring early was fast becoming the norm.
Super balances were high thanks to a soaring sharemarket, and this underpinned a preference for retiring at 50-something rather than in our 60’s. Fast forward to 2011 and it’s a different picture. A flat sharemarket has done little to help pre-retirees recoup their pre-GFC super balances. A lack of funds, coupled with rising living costs, is forcing many over 55’s to rethink their retirement. Industry research shows one in three pre –retirees believe they will have to work for as long as possible. Finding, and holding on to, a decent job isn’t all that easy for older workers. But if you can do it, the Federal Government offers worthwhile financial incentives. Workers over 55 may be eligible to claim the Mature Age Worker Tax Offset. If you’re eligible for the Age Pension, the government’s
Work Bonus Scheme is another good incentive to keep your hand in the workforce….. Extending your working life also means having additional employer contributions paid into your super fund. You can fast-track your fund balance with additional personal contributions. These can be made in a variety of ways, like salary sacrifice contributions (where you have part of your pre-tax pay directed into your super), or through out of pocket (un-deducted) contributions that you pay directly to your fund, The longer you work the more you can accumulate in your super fund. Along with financial benefits, work also offers important emotional and social pluses. Gradually winding your way out of the workforce by reducing your working hours can make the transition from worker to retiree easier to cope with. It’s always a good idea to speak with a financial planner in the lead-up to retirement. You might find that it won’t be necessary to work for quite as long after all. This can give you a clearer idea of how your investments should be structured to maximise your retirement income and age pension entitlements
.
How much will I need to retire? Capital required to maintain income throughout retirement (based on 6%)
Level of income (excluding the family home)
Capital required
$25,000 $416,666
$30,000 $500,000
$35,000 $583,333
$40,000 $666,666
$45,000 $750,000
$50,000 $833,333
$55,000 $916,666
$60,000 $1,000,000
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Learning activities
Read the two scenarios below and decide which investment options mentioned above would be best suited to each person’s superannuation fund:
Case 1: Margaret is 56 years old and looking at retiring in a few years. She has worked hard to obtain a balance of $250,000 in her Superannuation fund. As she does not own her house, she will be very reliant on this money to fund her retirement years. Throughout her life Margaret has been hesitant to take risks with any of the money house has earned. Case 2: Phillip is 28 years old and has built up $30,000 in his superannuation fund. He is keen to retire with a large sum of money in about 35 years’ time. Phillip does not mind taking risks if it means he can achieve a better return.
_____________________________________________________________________________
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A) What is superannuation?
__________________________________________________________________________
__________________________________________________________________________
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B) Is it something that all workers are entitled to receive from their employers?___________
C) What is the retirement age for Australians? _____________________________________
A) Describe the different investment options available when you have a superannuation fund.
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
b) Which are considered higher risk?
__________________________________________________________________________
__________________________________________________________________________
c) What is a self-managed superannuation fund?
http://www.moneysmart.gov.au/superannuation-and-retirement/self-managed-super
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__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
Compare the pair – you have no doubt seen these ads on TV, (Same age, same super
contributions but different outcomes!) a) What is an industry super fund?
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
b) What are the benefits of being in an industry super fund?
http://www.industrysuper.com/default.aspx
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
A) What is the age pension?
__________________________________________________________________________
_________________________________________________________________________
B) Who is eligible? ___________________________________________________________
c) Why do Australian workers need superannuation funds when the government provides
aged pensions? http://www.centrelink.gov.au/internet/internet.nsf/payments/age_pension.htm
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
For each of the people below, use the National Australia Bank superannuation calculator available at http://www.nab.com.au/wps/wcm/connect/nab/nab/home/personal_finance/1/4/9?WT.seg_1=MSAAY&WT.ac=MSAAY www.nab.com.au or http://www.mlc.com.au/SuperannuationCalculator/ to fill in the required information in the table. After completing the table, outline the assumptions made on the calculator and comment on the importance of contributing regularly to a superannuation fund to reach the desired goal.
Name Current amount
invested in superannuation
Age Amount person wants per year (in today’s dollars) for retirement
Amount invested in ordinary savings
Amount person will need to contribute each year to reach retirement goal
Tamara $8000 25 $30,000 Nil
Hans $31,000 32 $38,000 $25,000
John $121,000 47 $44,000 $60,000
http://www.nab.com.au/wps/wcm/connect/nab/nab/home/personal_finance/1/4/9?WT.seg_1=MSAAY&WT.ac=MSAAY
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__________________________________________________________________________
__________________________________________________________________________
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__________________________________________________________________________
Why do you think it is important to start saving for retirement early?
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Do you think women may be disadvantaged in their ability to save for retirement? Why or why not!
____________________________________________________________________________________
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A) What is salary sacrifice?
____________________________________________________________________________________
____________________________________________________________________________________
B) How else can you maximise your super?
_______________________________________________________________________________________
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c) What are the advantages of these extra payments?
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Many workers today over 55 years cannot afford to retire Why?
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
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What was the impact of the global financial crises on superannuation funds?
____________________________________________________________________________________
____________________________________________________________________________________
What are some of the risks associated with investing in Superannuation funds?
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
If my gross wage was $50,000, how much super would my employer have to contribute?
____________________________________________________________________________________
____________________________________________________________________________________
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If I needed $65,000 per year to fund my retirement, how much super would I have to have saved
based on 6% return.
____________________________________________________________________________________
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Glossary of Terms:
Assets Bonds Budget Capital Company Contribution margin Credit card Creditors Debit card Debtors Demand Dividend E-commerce EFTPOS Telecommuting Enterprise Entrepreneur Equity E-tail Expenses Fixed costs Franchise Income
Inflation
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Innovation Invention Liabilities Logo
Partnership Revenue Shares Slogan Sole trader Supply SWOT Target Market Variable costs
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